After a 3-year hiatus and armed with, among other things, the recommendations of two high-powered committees?the Percy Mistry committee and the Raghuram Rajan committee?the government has once again cautiously broached the subject of bringing commodity trading under the same umbrella as other assets by merging the Forward Markets Commission (FMC) with Sebi. Expectedly, it has immediately re-ignited a fierce turf battle.
Financial regulators in India today come from as many as six different ministries. Trading of financial assets itself is regulated by three distinct agencies? RBI regulates trading in government bonds and currencies, Sebi regulates trading in equity and equity derivatives, while FMC regulates trading in commodity and commodity derivatives. Today most large players operating in one segment need to manage risks using instruments in other segments, so these markets are essentially interlinked. This regulatory separation leads to loss of economies of scope and scale for market players, and builds incentive for regulatory gaming, reducing liquidity, price efficiency and even stability (monitoring the overall activities of large players becomes difficult owing to the fragmentation). Increasingly, even exchanges themselves are crossing regulatory walls. MCX, the biggest commodity exchange, also has the biggest platform for trading in rupee futures. Gold ETFs trade on stock exchanges. All this screams for regulatory consolidation.
Point out all these good reasons to FMC or its parent ministry, the ministry of consumer affairs, and you are unlikely to be persuasive at all. The first answer will be ?commodities are different?. They are supposed to be different from the ?papers? traded at equity exchanges since they affect food prices, directly affecting the lives of millions of poor people and farmers. The argument paints a world so cleanly segregated that it should give everyone else an inferiority complex, as if the rest of the financial system is just sitting there and playing monopoly with no impact on the real economy at all. Commodity prices are the sole determinants of everyone?s welfare and somehow only FMC knows how to get those right. The fact that these prices, regardless of their supposedly greater real effects, are exchange-determined by a system of trading like any other financial asset, and that the Sebi has considerable experience in regulating far more sophisticated and liquid markets, would cut no ice.
The next argument is that FMC has been in existence for over half a century while Sebi is hardly an adult, so what does this Johnny-come-lately know about exchanges that FMC does not. But that is precisely the point. FMC was created as an institution for a bygone era. Sebi?s youth means it has less baggage of outdated regulatory history and has also evolved quickly with the times. For much of FMC?s life, trading in commodity derivatives itself was outlawed. But more than anything else, the flaw lies in this adversarial thinking. It is not a question of Sebi vs FMC. The proposed dispensation hardly calls for FMC to shed its knowledge and experience.
FMC?s frustration is understandable though. With autonomy through an Act of Parliament almost shining in the horizon, it is now being told to report instead to an agency it considers its peer. That cannot be uplifting news to anyone.
This is the bane of all bureaucracy. Ego battles and turf wars affect national policy more than we think and infinitely more than they should. But the issues here are not exclusive to the government?many a corporate merger with great synergy has run into these same rocks. Organisations have their own incentives and identities that they fight to protect. Regulators and ministries are no exceptions.
The FMC-Sebi turf division is not the only problem that dogs commodity trading in India. The other equally important issue is the government attitude towards commodity derivatives. Banning commodity future trading seems to be the easiest way to fight inflation. If only it worked. The Abhijit Sen report of the Planning Commission found no link between the two. But that is hardly enough to persuade evidence-proof minds. Absorption within Sebi (perhaps more than autonomy itself, for autonomy does not necessarily change mindsets) will hopefully give it some more independence and voice to resist such arbitrary government measures.
Consolidation, whether of regulators or?the other powder-keg?banks in India, is surprisingly difficult to execute. So the quick softening of the finance ministry to let FMC keep its autonomy but start reporting to North Block for a change may very well have been the original game plan and may be an interim step to an eventual merger. For now it would escalate the turf battle to the inter-ministry level.
The author teaches finance at the Indian School of Business, Hyderabad